Community Development Investment Review

August 2009

Social Enterprise and Impact Investing - Volume 5, Issue 2

August 2009


David Erickson
Federal Reserve Bank of San Francisco

Community Development Investment Review

In Karl Polanyi’s seminal work, The Great Transformation, he argues that it was a radical departure for Western society in the early modern period to divorce land, labor, and capital from their traditional values, turning them into commodities that could be bought and sold.

The crucial point is this: labor, land, and money are essential elements of industry; they also must be organized in markets; in fact these markets form an absolutely vital part of the economic system. But labor, land, and money are obviously not commodities….Labor is only a another name for human activity which goes with life itself, which in its turn is not produced for sale for entirely different reasons, nor can that activity be detached from the rest of life, be stored or mobilized; land is only another name for nature, which is not produced by man; actual money, finally, is merely a token of purchasing power which, as a rule, is not produced at all, but comes into being through the mechanism of banking or state finance. None of them is produced for sale. The commodity description of labor, land, and money is entirely fictitious.1

Not long ago in Europe, and still in many places in the world today, traditional and community values reigned. In those circumstances, laborers did not measure their time by the hour and sell it to an employer, there were no real estate sales offices in the village center, and capital had yet to accumulate. (If Marx was right and capital was frozen labor, then the world still needed the nation-state and a modern financial system to play the role of the freezer.)

We may be on the edge of another period when we reintroduce community values to the commodities of land, labor, and capital. In this issue of the Review, we explore how both business enterprises and investment decisions can be infused with community goals—providing for those who are less capable of providing for themselves, promoting better health and stronger community fabric, and respecting the environment. Community development finance is already playing a supporting role in this evolution.

Kathy Brozek kicks off this issue and gives an overview of social enterprise, providing a context and tools for understanding the entire spectrum of business enterprises—from purely profit-motivated on one end, to purely charity on the other. Kevin Jones also explores social enterprises, particularly in terms of how their social missions can survive all stages of growth, even an initial public offering.

Antony Bugg-Levine and John Goldstein provide an overview for what they term “impact investing,” with an eye to how public policy, CRA-motivated banks, and individuals might promote this category of investment. Lisa Hagerman and Janneke Ratcliffe explore how we might better measure progress on community values in a given investment; sophisticated financial tools help measure profit, but these authors explore how to measure, in a meaningful and standardized way, the social and environmental good that comes from the investment. Saurabh Narain is also interested in measuring social and environmental outcomes and specifically shows how intermediaries—community banks and community development financial institutions—can provide the bridge from the world of global capital to the neighborhoods of need. Bruce Cahan also explores how a mission-oriented bank can be a useful intermediary between socially motivated savers and consumers and the larger economy.

Finally, our commentary section features a lively debate among leading thinkers in the field of social enterprise and impact investing, including Jed Emerson, Dan Pallota, Michael Shuman, Don Schaffer, Penelope Douglas, and Carla Javitz.

After the near collapse of the world financial system, it is time to reflect on whether social enterprise and investing might not offer some lessons for creating a more sustainable economy.

1. Karl Polanyi, The Great Transformation: The Political and Economic Origins of Our Time (Boston: Beacon Press, 1944), 72.

 The views expressed are not necessarily those of the Federal Reserve Bank of San Francisco or of the Federal Reserve System. Material herein may be reprinted or abstracted as long as the Community Development Investment Review is credited.

Read the full issue (pdf, 1.26 mb)

Table of Contents

Mission Insurance: How to Structure a Social Enterprise So Its Social and Environmental Goals Survive into the Future

Can a business’s social mission survive when a profitable social enterprise sells to a multinational?

Exploring the Continuum of Social and Financial Returns: When Does a Nonprofit Become a Social Enterprise?

Goodwill Industries and the YMCA have something in common: by most definitions they each would be considered a “social enterprise,” a relatively new and increasingly popular term in the United States.

Using High-Transparency Banks to Reconnect Money and Meaning

High-transparency banking is feasible and emerging. Public-interest accountability metrics can support a new crop of more trustworthy banks, highly-transparent as to their environmental and social impacts and corporate governance practices.

Impact Investing: Harnessing Capital Markets to Solve Problems at Scale

There is not enough charitable and government capital to meet the social and environmental challenges we face. Where, then, will we find the money to complement charity and government to bring solutions to scale?

Increasing Access to Capital: Could Better Measurement of Social and Environmental Outcomes Entice More Institutional Investment Capital into Underserved Communities?

The role of capital in promoting growth is more apparent than ever as communities across the country struggle to bolster sagging economies and stem job losses brought on by the credit crunch.

NCIF Social Performance Metrics: Increasing the Flow of Investments in Distressed Neighborhoods through Community Development Banking Institutions

Is it possible to develop a practical methodology that differentiates community development banking institutions from all other banks and thrifts?

Reject the Reset!

The present crisis in global capital markets rolls on.

Rethink Charity

Charity has come to business. From the holistic approach of Whole Foods to Product RED’s directing corporate advertising dollars to Target’s massive charitable giving program, business is realizing that making a difference in the world makes a difference for a brand.

Local Stock Exchanges and National Stimulus

Might it be time for policymakers to consider the potential stimulus payoffs from nurturing micro-equity investments?

At the Crossroads Where Economic Development, Job Creation and Workforce Development Intersect

Like a pattern forming in a kaleidoscope, the twin issues of job creation and employee training are emerging as a major focus among groups as diverse as the U.S. Chamber of Commerce and the AFL-CIO, environmentalists and proponents of infrastructure growth.

Value defines “value” as “the worth of something in terms of the amount of other things for which it can be exchanged.” Value is a concept that everyone understands, although what is valued, and how much worth something is given varies from epoch to epoch, society to society, and from person to person.

Could “Small Is Beautiful” Replace “Too Big to Fail?”

I encourage you to read “The Quiet Coup,” by Simon Johnson in the May 2009 issue of The Atlantic. Johnson is a former chief economist of the International Monetary Fund. Specifically, focus on the final section of the article, “The Way Out.” I was struck by Johnson’s discussion of the inherent problems of large-scale banks.